The decline is largely due to losses at the US e-commerce business, costs related to regional e-commerce logistics hub and expansion at 4PX (owned through Quantium Solutions).

Revenue not growing fast enough.

Top-line managed to increase 17% yoy on the back of contribution from its US e-commerce subsidiary, Couriers Please, as well as increased international mail revenue.

Nevertheless, top-line growth was dampened by operating expenses (+23% yoy), where key items such as volume-related expenses (+29% yoy) and labour-related expenses (+15%) showed no signs of abating and continued to ground earnings uplift.

STOCK IMPACT

Large impairment of TG not a surprise.

SPOST carried out a S$185m impairment charge for TG, which hit both goodwill and customer relationship. The loss was sizeable, where instead of a projected profit of S$9.4m for FY17, TG incurred a S$26m loss. This compared to FY16 net loss of S$1.6m when TG was acquired a year ago.

We note operations were mostly impacted by labour cost pressure, the loss of two key customers (30-40% of entity’s revenue) as well as disruption in the US fashion retail industry. These challenges will continue to be present in FY18.

TG restructuring underway but losses still expected in FY18.

Measures have since been in place to improve TG’s operating performance, such as warehouse automation and customer on-boarding efforts.

As part of a turnaround plan, management highlighted that a rebasing of TG’s prospects is underway, which we believe could mean a potential downsizing of this entity.

Given this and the possibility that SPOST may take time to recover the lost revenue from its two key customers, we lower our assumptions for TG’s revenue growth outlook. Our 3-year FY18-20 CAGR for e-commerce revenue now stands at 20%.

Postal: Structural decline showed no signs of letting up.

With 4QFY17 charting a steeper decrease in domestic mail revenue (-8% yoy), we believe the decline in domestic mail is not yet easing.

Going forward, we expect mail operating margins to remain suppressed as domestic mail revenue continues to be impacted by e-statements implementation and the shift to alternative online services.

Logistics: Still lack volumes.

Operating profit dropped 39% yoy owing to the costs of developing its e-commerce logistics network, higher depreciation at the new e-commerce logistics hub as well as depressed industry freight rates and volumes.

We believe margins at the logistics segment will continue to be squeezed by high transformation costs as volumes take time to ramp up.

Net cash; dividend payout of 66%.

On a more positive note, SPOST turned in a slight net cash of S$2.5m (FY16: net debt of S$154m), driven by its strong cash generating capabilities as well as proceeds received from Alibaba.

With big-ticket expansion projects mostly over, capex is estimated at a normalised S$60m-70m for FY18-20.

A final dividend of 0.5 S cents/share was declared, bringing the annual dividend to 3.5 S cents per share, representing a payout of 66% of underlying net profit.

EARNINGS REVISION/RISK

Introduce FY20 earnings; cut FY18-19 earnings estimates by up to 15%.

Our earnings revision reflects:

lower revenue growth assumptions at TG;

lower revenue assumptions at the mail segment to incorporate steeper decline in domestic mail; and

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